Manufacturing Account

Manufacturing Account: Trading enterprises that acquire ready-made items and resale them for a profit generate Trading and Profit and Loss Accounts at the conclusion of each accounting month. A Manufacturing Account is created in addition to these two final accounts for companies who make the things they sell.

The Manufacturing Account is used to calculate the overall cost of products manufactured or produced within the accounting period. All costs involved in transforming raw materials into completed items are included in the production cost, including raw material prices, direct labour and direct charges, and factory overhead expenses.

Costs of manufacturing or production

The cost of production may be broken down into two categories: prime cost and factory overhead charges. For the purposes of calculating manufacturing expenses, both of these charges are charged to the Manufacturing Account. The following is a breakdown of the many components that go into determining prime cost and manufacturing overhead charges.

Cost-effectiveness

All expenditures directly related to the production process are included in the prime cost. Raw materials, labour, and costs that can be traced back to the specific unit of products made are included. The prime costs will vary depending on how many units of product are generated. Increasing output simply implies utilising more raw materials, direct labour, and direct expenditures; for example, if output is raised by 50%, raw material costs, manufacturing wages, and direct expenses would all climb by about the same amount.

Raw Material Costs

One of the key prime expenses is the cost of raw materials required to manufacture the completed item. When estimating the cost of raw materials, the opening and closing stock of raw materials, as well as the purchase of raw materials, must be considered.

Any additional expenses spent in the acquisition of raw materials, such as duty, freight, or transportation, should be included to the net raw material purchases.

Cost of Direct Labor

These are wages given to workers who are directly engaged in the production of products. Direct wages refer to the pay provided to employees who work on the actual manufacturing line.

Expenses incurred directly

Other expenditures directly connected to production may be spent in addition to raw materials and labour costs. These expenditures include expenses for water and energy that can be linked back to the units of commodities produced, such as the quantity of water used in the manufacture of bottled beverages and the amount of power required in the baking of bread.

Royalties, which are payments given to the patentee for the right to use the patent for each unit of products produced, are an example of direct expenditures. A patent gives its owner the exclusive right to make a certain product for a specific length of time.

Expenses for Factory Overhead

These expenses are more closely tied to the general operations of the facility where production is carried out than to the actual fabrication of items.

Overhead costs are constant regardless of production. Regardless of whether production is raised or reduced, overhead costs stay basically constant.

The following are examples of factory overhead costs:

• Factory rents and rates
• Factory’s insurance
• Factory lighting and power
• Plant and equipment repairs and maintenance
• Tool, plant, and machinery depreciation

Wages and salaries given to people who work in the factory’s general operations and are not directly involved in manufacturing, such as factory engineers, supervisors, managers, forklift and crane drivers, cleaners, and security employees.

Cost of production

Manufacturing cost is made up of prime cost and factory overhead charges utilised in production and represents the overall cost of items produced during the time.

Currently in construction

In the preceding example, it is assumed that all of the factory’s work was completed at the end of the year, and that no partially produced items existed. A manufacturing company may have work-in-progress, or partially finished items, at the conclusion of the accounting period.

Production costs incurred during the accounting period will encompass both completed and unfinished commodities where work-in-progress exists. We must subtract the work-in-progress at the end of the year from the production cost if we want to know the cost of producing solely completed items throughout the year. The cost of supplies, labour, factory overhead charges, and other expenses that have gone into it are used to value the work-in-progress.

Where work-in-progress exists at the start of the accounting period, it must be included to the production cost before work-in-progress is deducted at the end of the year to determine the cost value of completed items for the year. Cost Flows in the Manufacturing Account and Manufacturing Profit Determination

Manufacturing Account

The manufacturer takes the following methods to arrive at his net profit figure:

Setting up a Manufacturing Account to calculate manufacturing costs: Prime Costs (cost of raw materials + direct labour and direct costs) + Factory Overhead Expenses = Production Cost

Calculation of gross manufacturing profit in the Manufacturing Account by comparing the market price of produced items to the manufacturing cost: Market Price of Manufactured Goods – Production Cost = Gross Manufacturing Profit

Setting up a Trading Account and calculating gross trading profit: Net Sales – Cost of Sales = Gross Trading Profit

Setting up a Profit and Loss Account to calculate net profit: Gross Manufacturing Profit + Gross Trading Profit + Any Gains – Expenses = Net Profit

Charge all manufacturing expenditures incurred in the manufacture of completed items to the Manufacturing Account.

Charge any purchasing expenditures incurred in the acquisition of products for resale to the Trading Account.

Charge all selling expenditures incurred in the sale and distribution of products, including all administrative charges, to the Profit and Loss Account.